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Abstract:
Incomplete contracting theory suggests that VC cash flow rights - including liquidation preferences - may be subject to renegotiation. Using a hand-collected dataset of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs' liquidation preferences are satisfied. However, such deviations tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm's choice of corporate law, give common shareholders power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.

Venture capital, preferred stock, liquidation preferences, corporate governance, incomplete contracting

Abstract:
This paper seeks to explain the widespread use of independent directors in the governance of VC-backed firms, and in particular their use as "tie-breakers" on the boards of these firms. Allocating a tie-breaking vote to an unbiased "arbiter" commits the entrepreneur and VCs to more reasonable behavior and can reduce the opportunism that would result if either party were to control the board. Consistent with my theory, data from Silicon Valley startups illustrate several mechanisms entrepreneurs and VCs use to select an unbiased independent director. I conclude by considering implications for corporate law and fiduciary obligations in VC-backed firms.

Venture capital, independent directors, corporate law, incomplete contracting

Abstract:
The financial contracting literature treats control as an indivisible right held either by a firm's entrepreneurs or by its investors. In contrast, data from VC-backed firms shows that board control is typically shared, with a third-party independent director holding the tie-breaking board seat ('ID-arbitration'). In this article I use a bargaining game similar to final offer arbitration to model a firm's choice of action under ID-arbitration. I show that ID-arbitration can reduce holdup by moderating each party's ex post threat position. Consequently, ID-arbitration can lead to the efficient outcome in circumstances where alternative governance arrangements - entrepreneur control, investor control, or state-contingent control - are either unavailable or likely to lead to suboptimal results.

Venture capital, control rights, incomplete contracting, corporate governance, board of directors

Abstract:
There is a risk of ex post opportunism between entrepreneurs and investors in firms financed by venture capital (VC). Entrepreneurs and VC investors have different interests with respect to numerous decisions, such as whether to replace the CEO or obtain additional financing. VC investors, who often hold substantial control rights in startup firms, may use their position opportunistically - causing a startup firm to take actions that benefit the VCs at the expense of the firm as a whole. This book chapter summarizes the existing literature on VC opportunism in three settings: (i) CEO replacement, (ii) Later-round financing, and (iii) VC exit.

Opportunism, Venture Capital, Corporate Governance